Employers in the United States and Europe grapple everyday with issues related to the proper deployment of contingent and temporary workers. So too in China, which has just now released new regulations in this area, which will take effect on March 1, 2014. All employers using contingent workers in China, typically referred to as an “agency workforce” or as “labor dispatch employees,” should take immediate steps to audit their practices and ensure compliance.
The agency workforce model in China involves a staffing agency, which hires a person (the agency worker), and seconds the person to work for and under the direct management of another entity (the user entity). In China, enterprises, governmental authorities, and state-owned not-for-profit organizations extensively use agency workforces in their businesses.
To regulate agency workforces and deter potential abuse, on December 28, 2012, the National People’s Congress promulgated the Amendment on Employment Contract Law (ECL Amendment), which enhances the restrictions on the use of agency workforces. Thirteen months later, on January 24, 2014, the Ministry of Human Resources and Social Security released the long-awaited Tentative Provisions on Agency Work (Provisions), which set forth implementing rules of the Amendment slated to take effect on March 1, 2014. The Provisions will redefine the agency workforce in China.
- Which user entities are subject to the Provisions?
The Provisions apply to all types of enterprises, i.e. for-profit organizations. They also apply to partnerships such as accounting firms and law firms, funds, and non-state-owned not-for-profit organizations. Besides legal entities, foreign enterprises also are allowed to set up representative offices in China, which are not Chinese legal entities and usually are only allowed to do liaison work. Representative offices are prohibited from hiring Chinese employees directly and can only use agency workers under Chinese law. For this reason, representative offices of foreign enterprises are exempted from the restrictions on the positions that can use agency workers and the number of agency workers (as discussed below.)
- Restrictions on use of agency workforce
The Provisions restrict the employment of agency workers to three categories of positions: temporary, auxiliary and substitute. “Temporary positions” exist for six months or less. “Auxiliary positions” refer to non-core business positions that support the core business positions. “Substitute positions” are created to fill in for regular employees who are on leave.
The definitions of temporary positions and substitute positions are straightforward. By contrast, the definition of “auxiliary position” seems relatively broad and unclear. The reason is that the scope of auxiliary positions varies significantly from industry to industry, which makes it very difficult to give a more precise definition. For example, a security guard in a manufacturing company no doubt works in an auxiliary position, but he/she works in a core position in a security service company.
As a result, the Provisions give user entities the right to determine the scope of auxiliary positions, but user entities are required to solicit comments from the relevant employees, and consult with union or employee representatives regarding the scope of auxiliary positions.
In addition to the restrictions on the types of positions where agency workers can be employed, the Provisions also require user entities to limit the number of agency workers. A user entity may not employ more than 10% of its total workforce as agency workers. For user entities that currently exceed this threshold, they have two years to reduce their agency workforce to the 10% level. However, until this threshold is reached, user entities are prohibited from hiring any new agency workers.
- Equal Work, Pay and Benefits
Agency workers frequently complain that they work as hard as or even harder than regular employees, but receive less pay and benefits. To address this issue, the Amendment provides that agency workers have the right to equal work and equal pay compared to their regular employee colleagues. The Provisions further require that user entities provide agency workers with employee benefits based on their position and prohibit discrimination against agency workers with respect to benefits.
It is not uncommon that a staffing agency will seek to save costs by enrolling its agency workers in the social insurance programs in the city where the staffing agency is located. Usually, the benefits under such social insurance programs are less robust than those under the social insurance programs in the city where the user entity is located. To address this issue, the Provisions require staffing agencies to enroll agency workers in the social insurance programs where the user entity is located. If the staffing agency is unable to enroll the employees at that location (e.g., because it does not have a legal entity in that location), the user entity is required to enroll the agency workers on behalf of the staffing agency.
The Provisions also make it clear that staffing agencies are mainly responsible for work-related injuries of agency workers. But staffing agencies and user entities may share such responsibility between them by agreement.
- Limited circumstances to return agency workers
Under the ECL, a user entity may return an agency worker to the staffing agency, and the staffing agency can thereafter terminate the agency worker for reasons under Article 39 of ECL (material misconduct), Article 40.1 (sickness), or Article 40.2 (incompetence). It has been unclear whether user entities can return agency workers for reasons under Article 40.3 (a material change of objective conditions rendering the employment contract incapable of performance), Article 41 (mass layoff for economic reasons), or Article 44 (when the user entity is bankrupt, dissolved or deregistered), or when the staffing service agreement between the user entity and the staffing agency expires.
Under the Provisions, user entities now are allowed to return agency workers under those circumstances, but the staffing agency is not allowed to subsequently terminate the agency workers after they are returned. The staffing agency may terminate the returned agency workers if they refuse to be reassigned to another user entity on the same or better employment conditions. In such a circumstance, the staffing agency is required to pay severance for the termination. An agency worker may refuse to be reassigned to another user entity on worse employment conditions. In such a case, the staffing agency must retain him/her until the termination or expiration of his/her employment contract and pay minimum wage to him/her during the retention.
- Penalties for noncompliance
The penalties for noncompliance of the Provisions appear to be modest. The labor authorities must first order user entities and staffing agencies to correct their violations. Fines, which can range from RMB 5,000 to RMB 10,000 per agency worker, may only be assessed if the user entity or the staffing agency in question refuses or fails to correct the violations.
An agency worker may bring a lawsuit to hold the staffing agency and/or user entity jointly and severally liable for his/her economic losses resulting from the violations of the Provisions. However, an agency worker does not have the right to be converted to a regular employee if he/she wrongfully is hired for a position that cannot lawfully be filled by an agency worker.
- Actions to take
We recommend that multinational companies that have legal entities in China, especially those having a significant number of employees in China, take the following actions to ensure compliance with the Amendment and Provisions.
- CONDUCT A SELF-AUDIT OF THE AGENCY WORKFORCE IN CHINA. THE FOLLOWING INFORMATION SHOULD BE REVIEWED:
- How many agency workers are used and what percentage of the total workforce do they constitute?
- What positions do the agency workers hold?
- What is the term of secondment of each agency worker? What is the signing date and expiration date of his/her existing employment contract?
- Is there any difference in the compensation and benefits between regular employees and agency workers who work in the same or similar positions?
- Which city’s social insurance programs did each agency worker enroll in? Is the city different from the one where he/she works?
- Which staffing agency is used? Does the staffing agency obtain the required permit to do the staffing business? What are terms and conditions of the staffing service agreement with the staffing agency?
- PREPARE AN OVERALL COMPLIANCE PLAN BASED ON THE RESULT OF SELF-AUDIT AND EXECUTE THE PLAN PROPERLY.
- Review the business case to determine whether and how much the agency workforce is needed in the coming years.
- Review and determine which positions are properly classified as temporary, auxiliary and substitute under the Provisions. For agency workers who work in other positions, a plan should be prepared to transfer them to permitted positions. Note that user entities must consult with the employees (and unions and employee representatives) regarding the scope of auxiliary positions.
- Reduce the number of agency workers to 10% or less of the workforce within two years, if the number currently exceeds 10%.To achieve that target, a user entity could convert agency workers to regular employees, terminate them, or a combination of both. To convert an agency worker to a regular employee, the user entity, the staffing agency, and the agency worker should enter into a three-party transfer agreement. The user entity should further conclude an employment contract with the agency worker. Termination of agency workers would be much more complicated. The ECL and Provisions only allow the user entity to return/terminate the agency worker under limited circumstances. Therefore, user entities should carefully choose the approach to terminating agency workers. In particular, where a large number of agency workers are being terminated, user entities should try to avoid workplace unrest. It is recommended that user entities seek legal advice when preparing the plan on reduction of its agency workforce. Note that under the Provisions, user entities are also required to file their plan on adjustment of agency workforce with local labor authorities.
- Review the existing compensation and benefits policies and practices to determine whether any policy or practice discriminates against agency workers. Proper action should be taken to eliminate any discriminatory elements, e.g. by amending existing policies or practices to equalize compensation or benefits. Note that if any such action results in an adverse impact on the compensation and benefits of the existing regular employees and/or agency workers, for example, a user entity chooses to reduce the regular employees’ pay or benefits to make them equal to what agency workers have, we strongly suggest that user entities seek legal advice before doing so. A reduction of compensation or benefits may not be allowed under the employment contracts or law. In addition, the consultation procedures under Article 4 of the ECL must also be followed.
- .Review the agency workers’ enrollment in social insurance programs and take proper steps to ensure that they are enrolled in the social insurance programs of the city where they work. If the existing staffing agency cannot enroll the agency workers in the required city, the user entity will either have to arrange to have the agency workers enrolled in its own name or switch to another staffing agency that can provide the proper enrollment.
- Review the service agreement with the staffing agency to determine whether any amendment is warranted to bring the service agreement into compliance with the Provisions. In addition, if the staffing agency fails to obtain the required permit for the staffing business, a plan should be prepared to switch to another qualified staffing agency, which will involve the transfer of the agency workers between the old and new staffing agency.
- Evaluate and determine whether to use other alternative workforces to cover manpower shortages caused by compliance with the Provisions. For example, consider outsourcing an aspect of the business that heavily relies on agency workforce, or use independent contractors. However, the line between outsourcing and agency work, and that between de facto employees and independent contractors, can be quite elusive. If considered as a subterfuge to avoid the restrictions under the Provisions, the user entities may be penalized. Legal advice should be sought when considering the use of an alternative workforce.